Investment Policy Statement

I am grateful for LivingaFI for prompting me to write down my own Investment Policy Statement (IPS). My IPS is below. I’ll set out the thinking behind it in more detail in separate blog posts (starting here).

Investment Philosophy
  • Diversify. In as many ways as possible.
  • Tax-efficiency regarding the investment owner and account, not regarding the actual holding.
  • Strong preference for liquidity, paid-out income, rising income, and low fees.
  • Presumption that passive investments are better than active investments.
  • Monitor progress against a target allocation; incrementally invest to rebalance underweight components; buying is much better than selling.
Asset allocation
  • Diversified against geographies bearing in mind both estimated long term time allocation and the country’s share of global public markets.
  • Diversified against equities, fixed income, and cash. Bias towards equities and against cash.
  • Diversified across providers, both of accounts and of ETFs/funds.
Funds and accounts
  • Exploit Mrs FIRE’s taxable allowances.
    • Maximise use of tax-free ISAs for both Mr FIRE and Mrs FIRE.
    • Moderate use of pensions for both Mr FIRE and Mrs FIRE, such that ideally one of us brushes the maximum asset cap and the other misses it by a bit.
  • Tax-free accounts to be the preferred accounts for holding both bonds and high-yield investments; taxable accounts are preferred for holding equities and low-yielding investments.
  • Partial use of offshore insurance bonds to provide flexibility, at the expense of fees
  • Financial advisers used only for complex planning or access to particular financial products, never for fund/stock selection.
Target allocation
UK USA Other international Aus Grand Total
Equity 40% 40% 16% 4% 100%
Fixed income 20% 15% 4% 1% 40%
Cash -25% -15% 0% 0% -40%
Total 40% 40% 20% 5% 100%
Other considerations
  • Rebalance when there is surplus cash and circumstances are propitious. A drift from target allocation is too high if it is 2% of total funds or 20% of the ideal allocation, whichever is smaller (e.g. for USA fixed income: target 5%, acceptable range is +/-20% i.e. 4.0-6.0%; for USA equities: target 20%, range is +/- 2% i.e. 18-22%).
  • In principle, work to reduce the number of underlying holdings. Actual holdings should be split across multiple owners and accounts.

Change log.

  • July 2016. UK Fixed income downweighted, US loan target reduced; slight shift towards equity along with a slight reduction in leverage.
  • January 2016.  Major rethink, caused by the Dream Home purchase and the portfolio loan used to buy it.  Shift towards lower risk, less UK-facing mix; UK downweighted (in case of Brexit), fixed income upweighted (for stability).
  • April 2015.  USA upweighted, UK downweighted (in frustration at paucity of attractive investments in UK).  Geographic split 55/25/14/6.  Asset split 80/15/5.  Round numbers; fixed income jitters.
  • Early 2014.  Australia mildly upweighted (reasons forgotten).  Geographic split 60/20/14/6.  Asset split 79/15/6.  Fixed income jitters.
  • Late 2012.  Original allocation.  Geographic split 60/20/15/5; asset split 77/19/4.

Any comments or suggestions very welcome.


8 Comments on “Investment Policy Statement”

  1. John says:

    I’m surprised at your target allocation – nothing specifically for Japan, nor Europe, nor Asia Pacific, nor Emerging Markets. 86% in US, UK and Aus seems very concentrated to me, and goes against your Diversify as much as possible policy.

    Like

    • John – very useful challenge, thank you.
      You are right that having 86% of my portfolio in US/UK/Aus, compared to about the ~50% of world stock markets that they represent, is concentrated. However as I say I think my personal world, i.e. my friends, family, spending, cost of living, etc is closely connected to the economies of those three countries. I ask myself ‘how would I feel if country X trebled, relative to now?’. If country X is the UK, this affects me strongly; if the UK economy tripled, I would want a part of it. If country X is Chile (or Taiwan, or South Africa), this hardly affects me at all. If Chile triples, I won’t feel ‘left out’ and be struggling to maintain my lifestyle against the Chileans (who would doubtless be making their presence felt in the London property market, but that’s another story). So basically I am comfortable hitching my colours to the UK/US/Australia and running the risk that I might forgo some returns (and some diversification benefit) from the rest of the world. In the same vein, most of my 14% rest-of-world holdings are in Europe; if Europe tripled vs the UK this would have quite an impact on me and my r-of-w exposure needs to provide a hedge against that scenario.

      Like

      • John says:

        That’s an Interesting perspective. Most of my ‘personal world’ is in the UK, and I also have a high weighting to this region. It seems inevitable… my house has to be here, my VCTs have to be here, my company share schemes have to be here and it was always easier to invest in UK equities and bonds than overseas assets, so together that means I’m 51% UK asset based. I have been trying to diversify across more regions ( I have about 3% of total assets in the USA and Australia isn’t even big enough to get it’s own catagory, so approximately 0-1% ) but without selling things ( incurring CGT, trading costs, having to make a decision ) it’s like change direction in an oil tanker.

        It’s also interesting that you are concerned about maintaining your relative position in the UK/US/Aus hierarchy, and are not so worried if the Chileans overtake Londoners with their standard of living, as long as you’re still one of the (and I’m assuming) better off British people. I had always gone with the idea that even at 30% UK assets will keep me in about the same relative position in the UK( as most people have little or no sale-able assets), and the larger growth from my emerging market assets might even push me further up the ladder ( although I am FI already, and I don’t have any social climbing ambitions )

        I also try to diversify across Larger and Smaller companies, and across Growth and Income strategies, which is another difference, but I have a preference for Active over Passive. I’m sure some people would say that I should swap everything for a Global Index tracker, but what sort of complex tracking spreadsheet could I build from that??

        Thank you for an interesting blog. It’s good to get new ideas to stimulate and challenge my existing thinking..

        Liked by 1 person

  2. Simon @MyRichFuture.com says:

    I’d also go with a more “buy the world” equity selection. If you want to increase home bias, that’s a personal choice (most people do this anyway but there are pros and cons).

    Like

  3. Stalflare says:

    Ciao FvL,

    Stalflare from Italy here…🙂 I have found your blog roaming around similar sites that I check usually, first of all let me compliment on the reports and the efforts, it looks like your allocation/investment rules are doing well for you. I have one question though: no list of current holdings? Not even just the names?

    ciao ciao

    Stal

    Liked by 1 person

    • Stalflare
      Thanks for your compliments. I’d love any suggestions/tips too please.
      I haven’t posted my full portfolio yet for a couple of reasons. The biggest reason is because I think it could reveal my identity which I do not want to do online. I am happy to cite specific holdings and have named about 30 o them, but overall I have over 200 positions and feel like that list is too big to be useful. I’m prepared to reconsider though: what would you use it for?

      Liked by 1 person

      • Stalflare says:

        Ciao FvL,

        Wow 200 positions!! You must be a professional trader! I struggle to keep hold of my 50 stocks… I do understand your position very well, I struggled a lot with the idea of posting my holdings and the real-time results, in the end I went for a “formula” that doesn’t disclose all that much, although if one wants to add up some numbers is easy to find out the total holdings and net wealth. As to my identity I guess that if someone wants to find it they will have little difficulty in doing so.

        Going back to the PF, on the top of reading several articles, most of which are interesting, looking at PF allocation also gives me ideas on stocks that might be useful holding. Without the PFs I wouldn’t have invested in Carillion or Legal & General just to name two.

        Either than that portfolios are not very useful to me, fluctuations in price are negligible (in the long run).

        maybe you could post a top 10?

        ciao ciao

        Stal

        Liked by 1 person

      • Stal – Yes I agree with you I find other portfolios interesting for a similar reason. On my blog the Diary page (https://firevlondon.com/diary/) is designed to give you some suggestions that way. My top 10 holdings are mostly either The Firm(s) or ETFs; some of my best ideas are quite small positions. But right now the stocks I consider to be interesting include KMI, RDSB, BLT, and MMM.

        Liked by 1 person


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